Direct Pay: How Schools, Cities, and Nonprofits Cash In on the Solar Credit

If your organization has no tax bill, elective pay turns the 30% solar credit into a check instead of a deduction you can never use.

Featuring Caleb Quaid, President, Clean Energy Help. Adapted from the SunSmart Engineering × Clean Energy Help × FlaSEIA panel, Commercial Solar in 2026. Watch the clip: "10 - Direct Pay, Solar Credits for Tax-Exempt Owners.mp4".

A solar tax credit only helps if you owe taxes. So what does a school district, a city, a church, or a nonprofit co-op do when it has no federal tax liability at all? For years the answer was nothing. They were locked out. The Inflation Reduction Act changed that, and the change opens up a customer base most contractors used to write off entirely.

What direct pay actually does

A tax credit reduces what you owe the IRS. Owe nothing, and the credit is worthless to you on its own. That is the spot most public and nonprofit building owners have always been in.

"One of the really innovative things in the Inflation Reduction Act when it came out in 2022 was the introduction of elective pay, commonly called direct pay," Caleb Quaid, President of Clean Energy Help, explained on the panel. "Before that, if you're a nonprofit, a city government, or a non-taxpayer with no tax liability, you couldn't benefit from a tax credit."

Elective pay is the IRA's formal term. Direct pay is what most people call it. Same thing, both established under IRA §6417. Instead of using the credit to offset taxes you don't owe, you get the value of the credit as a direct payment from the federal government. Here's how Caleb framed it: "elective pay was created as a process by which you can get a rebate for the Section 48E tax credit, 30%, or 40% if you meet domestic content, and a few other bonuses that could play in, even though you don't have the tax liability."

That's the whole headline. The same Section 48E Clean Electricity Investment Tax Credit (ITC) a for-profit developer would claim, generally 30% of eligible project cost with stackable adders like the +10% domestic content bonus and +10% energy community bonus, becomes a cash rebate for an entity that pays no tax.

Who can use it

The intent was deliberate. Lawmakers wanted public and community institutions putting solar on their buildings, and those owners needed a real reason to spend the money.

"Elective pay recognized that we want to incentivize governments, churches, homeowners associations, and these types of nonprofits to invest in solar, they need a benefit," Caleb said.

That covers a wide range of owners who had no path before:

• School districts and public universities
• City, county, and other government entities
• 501(c) nonprofits of many kinds
• Churches and other houses of worship
• Rural electric cooperatives and similar co-ops
• Homeowners associations
• Fire stations and other public facilities

"The big exciting news is it opens up a whole world for churches, fire stations, homeowners associations, a lot of these are able to get these credits now," Caleb said. For a contractor, that's a real expansion of the pipeline. A municipal building, a school roof, or a church parking canopy that never penciled out might now carry a 30%-plus federal rebate.

There's a process, so plan for it

Direct pay is generous, but it isn't automatic, and it doesn't behave like a normal tax filing. A lot of these entities have never filed a federal return in their lives.

"There is a process for it; it's a little more complex, because instead of just filing your taxes, a municipality or nonprofit might not even be used to filing taxes," Caleb noted. "There's a registration process and a few steps to claim the credit."

Three things to build into the timeline:

• Pre-filing registration with the IRS. Before claiming, the entity registers the project with the IRS and gets a registration number for the facility. This has to happen before the return goes in.
• A return to claim the payment. Even a tax-exempt entity files the appropriate return for the year the project is placed in service, attaches the credit forms, and reports the registration number to get paid.
• Timing tied to "placed in service." As with the taxable credit, the project generally has to be placed in service, meaning it has received Permission to Operate (PTO) from the utility, before the credit can be claimed.

Caleb's take was straightforward: "I love it; I think it's great." The practical advice for owners and contractors is to bake registration and filing into the project schedule from day one instead of treating them as paperwork to figure out at the end.

The eligibility rules still apply

Direct pay changes who can use the credit. It doesn't change the rules for earning it. A tax-exempt project clears the same hurdles a taxable one does.

Foreign Entity of Concern (FEOC) content restrictions still apply, and so do the domestic content requirements if you're chasing the +10% bonus that pushes the credit toward 40%. The non-FEOC content thresholds, the Material Assistance Cost Ratio, the domestic content certification, and the project deadlines from the One Big Beautiful Bill Act (OBBBA) are all covered in a separate article in this series. Elective pay is the payment mechanism. It is not a shortcut around eligibility.

One reality check: these rules are still moving. Credit percentages, FEOC guidance, and the registration process were current as of the June 2026 webinar and remain subject to change. Confirm the specifics with a qualified tax advisor before you commit.

Key takeaways

• Elective pay (direct pay), under IRA §6417, lets tax-exempt owners receive the solar credit's value as a cash payment even with no tax liability.
• It applies to the Section 48E ITC: generally 30%, or up to 40% with domestic content and other bonuses.
• Eligible owners include school districts, cities, nonprofits, co-ops, HOAs, churches, and fire stations.
• It's not automatic. There's an IRS pre-filing registration plus a return to file, even for entities that have never filed before.
• FEOC and domestic content rules still apply. Direct pay changes who can claim, not what qualifies (see our separate article on the catches).
• All figures and rules were current as of June 2026 and continue to change. Verify with a qualified advisor.

How SunSmart Engineering can help

SunSmart Engineering provides full-service engineering for solar and energy storage projects nationwide, including the public, municipal, and nonprofit buildings that direct pay now makes viable. We design code-compliant, utility-ready plan sets and help your team line up the project so it's positioned for the credit, so the engineering never becomes the reason a tax-exempt owner misses out. Visit sunsmartengineering.com or call 866-786-8655.

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Educational information only, not tax, legal, or engineering advice. Rules referenced (credits, FEOC, safe-harbor litigation, and the July 4, 2026 / December 31, 2027 dates) were current as of the June 2026 webinar and continue to change. Confirm current requirements with a qualified professional before acting.